RATIO ANALYSIS

RATIO ANALYSIS

Ratio analysis is one of the techniques of financial analysis to evaluate the financial condit

According to Myers, “Ratio analysis of financial statements is a study of relationship amo

Advantages and Uses of Ratio Analysis

There are various groups of people who are interested in analysis of financial position of a

1. To
workout
the
profitabili
ty.
2. To
workout
the
solvency.
3.
Helpful in
analysis
of
financial
statement
4.
Helpful in
comparati
ve
analysis
of the
performa
nce
5. To
simplify
the
accountin
g
informati
on
6. To
workout
the
operating
efficiency
7. To
workout
short-
term
financial
position
8.
Helpful
for
forecastin
g
purposes

Limitations of Ratio Analysis

In spite of many advantages, there are certain limitations of the ratio analysis techniques an

1. Limited Comparability
2. False Results
3. Effect of Price Level Changes
4. Qualitative factors are ignored
5. Effect of window-dressing
6. Costly Technique
7.
Misleadin
g Results

8.
Absence
of
standard
university
accepted
terminolo
gy

Classification of Liquidity Ratios:

a. Current Ratio
b. Liquid Ratio
Meaning and Method of Calculation:

a. Current Ratio: Current ratio is calculated in order to work out firm’s ability to pay of

Current Ratio = Current Assets/Current Liabilities

Current Assets include Cash in hand, Cash at Bank, Sundry Debtors, Bills

Current Liabilities include Sundry Creditors, Bills Payable, Bank Overdraf

 b. Liquid Ratio: Liquid ratio shows short-term solvency of a business in a true manner.

Liquid Ratio = Liquid Assets/Current Liabilities

Where liquid assets include Cash in hand, Cash at Bank, Sundry Debtors, Bills R

Current liabilities include Sundry Creditors, Bills Payable, Bank Overdraft, Outs

LIQUIDI
TY
RATIOS
RATIOS 2008-09 Ratio 2009-10 Ratio

CURREN
T RATIO

CURREN 44459.77 12.6 64711.8 167.33

T
ASSETS
CURREN 112674.54 209604.83
T
LIABILIT
IES

QUICK
RATIO
QUICK 44459.77 12.6 64711.8 167.32
ASSETS
CURREN 172674.54 209604.83
T
LIABILIT
IES

ABSOLU
TE
LIQUIDI
TY
RATIO
CASH + 13528.62 0.85 26699.99 0.32
BANK +
MARKET
ABLE
SECURIT
IES
172674.54 209604.83
CURREN
T
LIABILIT
IES

Classificat
ion of
various
profitabili
ty ratios: -

a. Gross Profit Ratio

b. Net Profit Ratio
c. Operating Net Profit Ratio
d. Operating Ratio

Meaning Method of Calculation: -

a. Gross Profit Ratio: Gross Profit Ratio shows the relationship between Gross Profit o

Gross Profit Ratio = Gross Profit/Net Sales x 100

Where Gross Profit = Net Sales – Cost of Goods Sold

Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses – Clos
 And Net Sales = Total Sales – Sales Return

b. Net Profit Ratio: Net Profit Ratio shows the relationship between Net Profit of the co

Net Profit Ratio = Net Profit/Net Sales x 100

Where Net Profit = Gross Profit – Selling and Distribution Expenses – Office an

And Net Sales = Total Sales – Sales Return

c. Operating Profit Ratio: Operating Profit means profit earned by the concern from its

Operating Profit Ratio shows the relationship between Operating Profit and Net

Operating Profit Ratio = Operating Profit/Net Sales x 100

Where Operating Profit = Gross Profit – Operating Expenses

Or Operating Profit = Net Profit + Non Operating Expenses – Non Operating In

And Net Sales = Total Sales – Sales Return

d. Operating Ratio: Operating Ratio matches the operating cost to the net sales of the b

Operating Ratio = Operating Cost/Net Sales x 100

Where Operating Cost = Cost of goods sold + Operating Expenses

Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses – Clos

Operating Expenses = Selling and Distribution Expenses, Office and Administra

PROFIT
ABILITY
RATIOS
PROFIT 2008-2009 Ratio 2009-10 Ratio
ABILITY
RATIOS
GROSS
PROFIT
RATIO

GROSS 132.83 100% 334.68 100%

PROFIT *100 *100
*100
INCOME 132.83 334.68

NET
PROFIT
RATIO

NET 94.68 71.27% 248.90 74.37%

PROFIT *100 *100
*100
INCOME 132.83 334.68

OPERAT
ING
PROFIT
RATIO

OPERATI 101.41 76.35 256.64 76.68

NG *100 *100
PROFIT
*100
TOTAL 132.83 334.68
INCOME

OPERAT
ING
RATIO
DIRECT + 31.42 23.65% 78.04 23.32
OPERATI *100 *100
NG COST
*100

TOTAL 132.83 334.68

INCOME
s to evaluate the financial condition and performance of a business concern. Simply, ratio means the comparison of one figure

ts is a study of relationship among various financial factors in a business as disclosed by a single set of statements and a stud

nalysis of financial position of a company. They use the ratio analysis to work out a particular financial characteristic of the c
f the ratio analysis techniques and they should be kept in mind while using them in interpreting financial statements. The foll

work out firm’s ability to pay off its short-term liabilities. This ratio is also called working capital ratio. This ratio explains th

bilities

t Bank, Sundry Debtors, Bills Receivable, Stock of Goods, Short-term Investments, Prepaid Expenses, Accrued Incom

Bills Payable, Bank Overdraft, Outstanding Expenses etc.

y of a business in a true manner. It is also called acid-test ratio and quick ratio. It is calculated in order to know how quickly c

at Bank, Sundry Debtors, Bills Receivable, Short-term Investments etc. In other words, all current assets are liquid assets exc

s Payable, Bank Overdraft, Outstanding Expenses etc.

tionship between Gross Profit of the concern and its Net Sales. Gross Profit Ratio can be calculated in the following manner:

x 100

s Sold

chases + Direct Expenses – Closing Stock

ship between Net Profit of the concern and Its Net Sales. Net Profit Ratio can be calculated in the following manner: -

istribution Expenses – Office and Administration Expenses – Financial Expenses – Non Operating Expenses + Non Operatin

it earned by the concern from its business operation and not from the other sources. While calculating the net profit of the con

tween Operating Profit and Net Sales. Operating Profit Ratio can be calculated in the following manner: -

ng Expenses

g Expenses – Non Operating Incomes

ing cost to the net sales of the business. Operating Cost means Cost of goods sold plus Operating Expenses.

perating Expenses

chases + Direct Expenses – Closing Stock

Expenses, Office and Administration Expenses, Repair and Maintenance.

ans the comparison of one figure to other relevant figure or figures.

ngle set of statements and a study of trend of these factors as shown in a series of statements."

r financial characteristic of the company in which they are interested. Ratio analysis helps the various groups in the following
ng financial statements. The following are the main limitations of accounting ratios:

apital ratio. This ratio explains the relationship between current assets and current liabilities of a business. Where current asse

paid Expenses, Accrued Incomes etc.

in order to know how quickly current liabilities can be paid with the help of quick assets. Quick assets mean those assets, wh

rrent assets are liquid assets except stock and prepaid expenses.
culated in the following manner: -
 the following manner: -

rating Expenses + Non Operating Incomes.

lculating the net profit of the concern all incomes either they are not part of the business operation like Rent from tenants, Int

ng manner: -

ating Expenses.
various groups in the following manner: -
f a business. Where current assets are those assets which are either in the form of cash or easily convertible into cash within a
uick assets mean those assets, which are quickly convertible into cash.
ation like Rent from tenants, Interest on Investment etc. are added and all non-operating expenses are deducted. So, while cal
ly convertible into cash within a year. Similarly, liabilities, which are to be paid within an accounting year, are called current
nses are deducted. So, while calculating operating profit these all are ignored and the concern comes to know about its busine
counting year, are called current liabilities.
n comes to know about its business income from its business operations.